Questions and Answers of Foundations of Finance

Christchurch Dairy Products, the maker of New Zealand’s finest cheese, is considering the purchase of a new cheese wrapping machine. The investment requires an initial outlay of NZ$$124,000$ and
Mooby’s is considering building a new theme park. After future cash flows were estimated, but before the project could be evaluated, the economy picked up and with that surge in the economy
Perodua Automobiles is considering expanding its capacity to produce Aruz, its most popular model. Adding to capacity will increase daily output by 15 percent. The required rate of return on this
Calculate the NPV given the following free cash flows if the appropriate required rate of return is 10 percent.Should the project be accepted? YEAR 0 1 CASH FLOWS -$60,000 20,000 2 20,000 3 10,000 4
Calculate the NPV given the following free cash flows if the appropriate required rate of return is 12 percent.Should the project be accepted? YEAR CASH FLOWS 0 1 2 -$75,000 32,000 32,000 3 32,000 4
Calculate the MIRR given the following free cash flows if the appropriate rate of return is 9 percent (use this as the reinvestment rate).Should the project be accepted? 6 4 YEAR 1 0 CASH FLOWS
Calculate the PI given the following free cash flows if the appropriate rate of return is 12 percent.Should the project be accepted? YEAR 0 1 CASH FLOWS -$50,000 12,000 2 12,000 3 12,000 4 12,000 5
Delhi Tandoori House is considering an expansion project with the following expected free cash flows:If the project’s appropriate discount rate is 11 percent, what is its discounted payback? YEAR
You are the owner of Royal Sports House and are considering a project with the following cash flows. If the appropriate discount rate is 9 percent, what is the project’s discounted payback period?
Assuming an appropriate discount rate of 12 percent for a project in Papua New Guinea, what is the discounted payback period on a project with an initial outlay of $$128,000$ and the following free
United Airlines is considering purchasing two Airbus A320 narrow body aircrafts that cost $202 million. The planes are expected to last 10 years and produce future free cash flows of$25,175,000 per
Your investment advisor has offered you an investment that will provide you with one cash flow of $$10,000$ at the end of 20 years if you pay premiums of $$200$ per year at the end of each year
Wilson Publishing is considering building a printing facility in Sweden that will involve a large initial outlay and then result in a series of positive free cash flows for 4 years. The estimated
Giddy Entertainment Company is considering the construction of a new amusement park. The park will have an initial cash outlay of $$8$ million and will produce free cash flows of $$3.5$ million
Dundee McClintock Pulp Co. is considering purchasing a new sawing machine that costs $$460,000.$ This machine will produce free cash inflows of $$168,000$ each year at the end of years 1 through
Ariel’s Washing Company is considering investment in a new machine. This investment would require an initial cash outlay of $$10$ million and would generate annual free cash inflows of
Kanye Company Ltd. is considering five capital investment proposals for which the total funds available are limited to a maximum of $10 million. The projects are independent and have the following
Nanotech, Inc. currently has an electronics production facility, and it is cost-prohibitive to expand this production facility. Nanotech is deciding among the following four contracts:Which project
ArcelorMittal S.A. is considering purchasing one of two mining machines for the upcoming year.The more expensive of the two is better and will produce a higher yield. Assume these investment projects
Industrial Zone & Group, which operates in the building and construction industry in the South Caucasus, is considering making investments in one of two different regional projects. Project 1 would
What is the value of Brunei Petroleum Company’s preferred stock when the dividend rate is 18 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 14 percent.
The preferred stock of the Luxemburg Mining Corporation pays a $3.25 dividend. What is the value of the stock if your required rate of return is 8 percent?
What is the value of Queens Park PLC’s preferred stock when the dividend rate is 10 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 16 percent.
Calculate the value of Swatch’s preferred stock that pays a dividend of $8 per share if your required rate of return is 14 percent.
You are considering an investment in one of the preferred stocks of either Longines Watch Company or Titoni Watch Company. Longines’s preferred stock pays an annual dividend of $$2.73,$ while
Midwest Energy Group has issued preferred stocks ($10 par value) that pay 8 percent dividend annually. If the required rate of return is 15 percent, what is the value of the stock?
Air Solomon’s common stock paid $1.47 in dividends last year, and the dividend is expected to grow indefinitely at an annual 6 percent rate. What is the value of the stock if you require a 9
The dividend policy of Scorpio, Inc. has recently been revised to payout 40 percent of its earnings to shareholders. The company has just paid dividends of $3 per share.a. Calculate the growth rate
Ethiopian Airlines pays a dividend of $$1$ and is currently selling for $$43.75.$ If investors require a 12 percent return on their investment from buying the stock, what growth rate would the
You intend to purchase Arsenal F.C.’s common stock at $$55$ per share, hold it for 1 year, and then sell it after a dividend of $$7$ is paid. How much will the stock price have to appreciate
Kawasaki Motors paid a $4.50 dividend last year. At a constant growth rate of 6 percent, what is the value of the common stock if the investors require a 15 percent rate of return?
Given that a firm’s return on equity is 16 percent and the management plans to retain 35 percent of earnings for investment purposes, what will be the firm’s growth rate?
The common stock of Hyundai Motors paid $1.65 in dividends last year. Dividends are expected to grow at a 7 percent annual rate for an indefinite number of years.a. If Hyundai’s current market
Bugatti’s return on equity is 15 percent, and the management plans to retain 50 percent of earnings for investment purposes. What will be the firm’s growth rate?
Essilor International’s common stock pays a dividend of $$0.85.$ It is currently selling for $$35.54.$ If the firm’s investors require a 12 percent return on their investment from buying
Antwerp Water Works is selling for $$67.87$ per share and paid a dividend of $$1.38$ last year. The dividend is expected to grow at 5 percent indefinitely. What is the stock’s expected rate of
You are planning to purchase 200 shares of preferred stock and must choose between the preferred shares of Compagnie Maritime Belge (CMB) or Delhaize Le Lion. CMB’s stock pays an annual dividend of
Bestattung Wien’s preferred stock is selling for $$43.29$ per share and pays $$2.10$ in dividends.What is your expected rate of return if you purchase the security at market price?
You own 250 shares Magna Steyr AG’s preferred stock, which currently sells for $$55$ per share and pays an annual dividend of $$4.20$ per share.a. What is your expected return?b. If you require
You own 350 shares of Voestalpine AG’s preferred stock at a market price of $$32$ per share. Voestalpine AG pays a dividend of $$1.65.$ What is your expected rate of return? If you have a
You are considering the purchase of 150 shares of CityLine Hungary Ltd.’s preferred stock. Your required return is 9 percent. If the stock is currently selling for $$45$ and pays a dividend of
You are considering the purchase of Ganz’s preferred stock at a market price of $$56.23$ per share. Assume the stock pays an annual dividend of $$4.78.$ What would your expected return be?
Leo Express’s common stock currently sells for $$26$ per share. The company’s executives anticipate a constant growth of 11.5 percent and an end-of-year dividend of $$3.00$.a. What is your
The market price for the Fidesco Group’s common stock is $$64$ per share. The price at the end of year 1 is expected to be $$75,$ and dividends for next year should be $$3.98.$ What is the
If you purchased 125 shares of Avia Solutions Group’s common stock for $$32$ per share, what is your expected rate of return if the stock pays end-of-year dividend of $$3.68?$ Assume the stock
Maxima Group’s executives anticipate a growth rate of 9 percent for the company’s common stock. The stock is currently selling for $$47.65$ per share and pays an end-of-year dividend of
The Madagascar Corporation wants to achieve a steady 9 percent growth rate. If it can achieve a 13 percent return on equity, what percentage of earnings must Madagascar retain for investment purposes?
Define the term cost of capital.
Compute the cost of the following:a. A government bond that has a $$1,000$ par value (face value) and a contract or coupon interest rate of 8 percent.A new issue would have a flotation cost of 4
In early 2018, the Alfa Corporation issued new common stock at a market price of $$30.$ Dividends last year were $$2$ and are expected to grow at an annual rate of 3 percent forever. Flotation
The preferred stock of Brille Power Co. sells for $$35$ and pays 5 percent of the earnings in dividends. The net price of the security after issuance costs is $$30.$ What is the cost of capital
ArcelorMittal S.A. is contemplating a new investment to be financed 37 percent from debt. The firm could sell new $$1,000$ par value bonds at a net price of $$925.$ The coupon interest rate is 10
Global Dominion Access is planning to issue preferred stock. The stock sells for $$140;$ however, if new stock is issued, the company would receive only $$115.$ The par value of the stock is
Energias de Portugal’s common stock is currently selling for $$27.32.$ Dividends paid last year were $$0.75$.Flotation costs on issuing stock will be 12 percent of market price.The dividends
The common stock for Beta Corporation sells for $$50.$ If a new issue is sold, the flotation costs are estimated to be 5 percent. The company pays 50 percent of its earnings in dividends, and a
Doosan Babcock, a Scottish electronic equipment manufacturer and a publicly held company, is evaluating the cost of equity capital for the firm. The firm’s shares are selling for $$35.00;$ it
Compute the costs of the following sources of financing for Doosan Babcock:a. A $$1,000$ par value bond with a market price of $$985$ and a coupon interest rate of 12 percent. Flotation costs for
Rework Problem 9-12. Assume a 16 percent coupon rate.a. What effect does changing the coupon rate have on the firm’s after-tax cost of capital?b. Why is there a change?Data from problem
Kenmare Resources PLC is a mining company based in the Republic of Ireland and listed on the Irish Stock Exchange. The firm has estimated its weighted average cost of capital to be 11 percent based
Ambeon Holdings PLC is a publicly held company. The firm began as a textile company but grew to become a leading diversified conglomerate with a presence in industries such as textiles, porcelain,
The capital structure for the ABC Corporation is provided below. The company plans to maintain its debt structure in the future. If the firm has a 7 percent after-tax cost of debt, a 12.5 percent
Alfa Trading Co. operates a very successful chain of dairy shops and tea houses across the South Caucasus. Alfa needs to raise funds for its planned expansion into Ukraine and Moldova. The
Astra International is a manufacturer of automotive parts. When one of its machines malfunctions, the company sends out a repair technician; if he cannot repair it on the spot, he puts in a
The State Oil Company of Azerbaijan Republic (SOCAR) is an integrated oil company headquartered in Baku, Azerbaijan, and has large operations in nearby regions.Historically, SOCAR did not spend a
In June of this year, the Barramundi Mfg. Company’s capital investment review committee received two major investment proposals. One of the proposals was issued by the firm’s domestic
Ebertlang Corporation is a provider of computer software and IT services in two of the largest regions of Eastern Europe. In the past, the company’s managers have used a single company-wide cost of
Nealon Energy Corporation engages in the acquisition, exploration, development, and production of natural gas and oil in the continental United States. The company has grown rapidly over the last 5
Marks & Spencer Group PLC has a beta of 0.94. If the return on U.K. Treasury bills is 1.94 percent and the return on FTSE All-Share Index is 5 percent, what is the expected return and the risk
The expected return for the general market is 12.2 percent, and the risk premium in the market is 9.1 percent. Stocks A, B, and C have betas of 0.856, 0.698, and 0.547, respectively. What are the
Stanislas Korowski owns a portfolio consisting of the following stocks below:The risk-free rate is 4 percent. Also, the expected return on the market portfolio is 12 percent.a. Calculate the expected
Assume Karen Korrs has the following portfolio.What is the portfolio’s beta? STOCK Mitsubishi UFJ Takeda STOCK WEIGHT BETA 23% 1.37 5% 1.56 Isetan Mitsukoshi 35% 1.05 Toyota 17% 1.15 Kyocera 20%
The data below is extracted from the Financial Times website about the betas of four companies listed on the FTSE 100 Index, namely Vodafone, Tesco, British Petroleum, and British Telecom. The rate
Siam Cement Group (SCG) is planning to invest in a security that has several possible rates of returns.Given the following probability distribution of returns, what is the expected rate of return on
Given the holding-period returns shown here, calculate the average returns and the standard deviations for the Renault Corporation and for the market. MONTH RENAULT CORPORATION MARKET 1 5% 3% 2 7% 4%
Louis Vuitton SE is evaluating a security. Calculate the investment’s expected return and its standard deviation. PROBABILITY RETURN 0.20 7% 0.25 10% 0.40 12% 0.15 18%
Donna, a chartered financial analyst in London, United Kingdom, is wanting to invest in securities listed on the Alternative Investment Market (AIM) which is the London Stock Exchange’s sub-market
Given the following probabilities and returns for Tenaga Nasional Berhad, find the standard deviation. PROBABILITY 0.35 RETURN 8% 3% 0.20 0.20 20% 0.25 15%
From the price data for San Miguel Beverages, Inc. that follow, compute the holding-period returns for periods 2 through 4. PERIOD STOCK PRICE $12 2 14 3 10 4 16
a. From the price data here, compute the holding-period returns for Temasek Holdings and SingTel for periods 2 through 4.b. How would you interpret the meaning of a holding period return? PERIOD
a. Given the holding-period returns shown here, compute the average returns and the standard deviations for Zing Telecom and for the market.b. If Zing’s beta is 1.67 and the risk-free rate is 5
Suppose you own the share of Estate Lancaster PLC and the expected dividends on this share is £0.17 in one year. Calculate the holding-period dollar gain and return on this share if its current
The following are the end-of-month prices for both Hong Kong’s Hang Seng Index and Sun Hung Kai Properties Ltd.’s common stock.a. Using the data here, calculate the holding-period returns for
Using the CAPM, estimate the appropriate required rate of return for the three stocks listed here, given that the risk-free rate is 3 percent and the expected return for the market is 5 percent.
How does a bond’s intrinsic value differ from its market value?Under what circumstance might they be equal?
What is the yield to maturity of a bond?
Siam Cement Group (SCG) bonds have an annual coupon rate of 7 percent and a par value of $1,000 and will mature in 15 years. If you require a return of 8 percent, what price would you be willing to
In December 2015, Alpha Technologies PLC issued coupon bonds with par value £100. The coupon rate is 8 percent annually and the bonds will be redeemed at par value in December 2020. What is the
Peter de Vert owns a 25-year, $$1,000$ par value bond paying 6 percent interest annually. The market price of the bond is $$880,$ and his required rate of return is 8.7 percent.a. Compute the
Calculate the value of a Samurai bond that will mature in 16 years and has a ¥100,000 face value. The annual coupon interest rate is 4 percent, and the investor’s required rate of return is 6
At the beginning of the year, Stephanie Jo bought a $$40,000$ par value corporate bond with a 7 percent annual coupon rate and a 12-year maturity date. When she bought the bond, it had an expected
Kuhne & Nagel bonds have an 8 percent coupon rate. The interest is paid semiannually, and the bonds mature in 14 years. Their par value is $1,000. If your required rate of return is 6 percent, what
San Miguel Company’s 18-year, $$1,000$ par value bonds pay 6.5 percent interest annually. The market price of the bonds is $$1,105,$ and your required rate of return is 8.5 percent.a. Compute
Cashew Nut owns a bond that pays $$80$ in annual interest, with a $$1,000$ par value. It matures in 14 years.His required rate of return is 8 percent.a. Calculate the value of the bond.b. How
Cemex, a Mexican multinational building materials company, issued a bond with a $$1,000$ par value that pays $$60$ in annual interest. It matures in 30 years. Your required rate of return is 4
Barrick Australia Pacific is planning on issuing bonds that pay no interest but can be converted into $1,000 at maturity, 9 years from their purchase. To price these bonds competitively with other
Suppose that Barclays PLC has issued bonds with a par value of £100 that pay a 5 percent coupon interest rate and mature in 5 years. What is the price of the bonds if the market interest rate is 5
Ricoh issued bonds that pay $76.50 in interest each year and will mature in 8 years. You are thinking about purchasing the bonds. You have decided that you would need a 5.5 percent return on your
Danang Rubber Co.’s bonds are selling in the market for $$1,060.$ These 13-year bonds pay 9 percent interest annually on a $$1,000$ par value. If they are purchased at the market price, what is
The market price of an Indochina Airlines bond ($$1,000$ par value) with an 8-year maturity is $$845.$ The bond pays 8 percent interest (4 percent semiannually). What is the bond’s expected
You own a Ceylon Tea bond with a par value of $$1,000$ and an 8-year maturity. It pays a 7 percent annual coupon rate. The bond currently sells for $$1,150$.What is the bond’s expected rate of

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